"A punt buying at the moment" ? a) On 26 March 2016 , The...

"A punt buying at the moment" ?

a) On 26 March 2016 , The Financial Times reported that Reuters UK had issued a research report on SGH that involved 10 Reuters analysts. Their recommendations for SGH for the next 12 months was HOLD , and price forecasts were LOW $ 0.41, MEDIUM $ 1.30 and High $ 8.73.
I did not see any comment on this in the local media.

b) There are also many financial engineering propositions to resolve the high debt load, that may involve the issue of preference shares, convertible notes and selling parts of the company.
For example my (humble) suggestion is, float SGH's Australian operation (SGA) as a separate listed entity, issue some debentures and use the proceeds to reduce the syndicate bank loans, but keep SGA as part of the SGH group.
$ 400 mil can be raised by selling 40% of SGA plus a debenture issue.

The valuation of SGA, based on SGH valuations before the Quindell acquisition.

i) Based on an average of the share price and shares outstanding on 30/6/14, 204.3 mil@ $ 4.80, and 31/12/14, 208.7 mil@ $ 6, the average market value is $ 1,116 mil. Add the debt of $ 486 mil,(30/6/14), the enterprise value is $ 1,600 mil.

ii) The NPAT for SGA for FY 2014, $ 33.4 mil and FY 2015 $ 45.7 mil, were about the same as the UK operations, excluding SGS, at $ 42.7 and $ 34.8 mil. therefore a reasonable assumption is that SGA would command half the $ 1,600 mil enterprise value , i.e. $ 800 mil in its own right.

iii) Let's assume that SGA raises a 5 year 7% fixed rate debentures of $ 200 mil.

iv) Organise an IPO for $ 200 mil, for 40% of SGA at a discount of 16.6%,$ 40 mil, of its theoretical value of $ 800 mil less $200 mil debenture.
This raises $ 400 mil to reduce the syndicate loans to $ 360 mil.
This could be achieved within 6 months.

v) Given the large provisioning and write downs of the SHS operations, SGH should also receive the $ 90 mil held in Escrow by late October. This can reduce the syndicate loans to $ 270 mil.

c) The goodwill impairment of $876.4 mil, was mainly in SGS, but subject to management's expectation that $ 636 mil is recoverable. That would leave a net impairment of $ 240 mil. After recovering the $ 90 mil from Escrow, leaves the net impairment to $ 150 mil.
Not a big deal, particularly since SGS is a game changer for SGH in the UK to provide growth. AG will be fully vindicated.

d) SGH group valuation and share price effect.
60% of SGA, s valuation of $ 600 mil $ 360 mil
100% of SGUK $ 800 mil less debt of $ 486 $ 312 ,,
SGS assets of $ 1,724 less liabilities of $ 371.8 $1,353 ,,
less loan syndicate balance $ -270 ,,
NET VALUE $ 1,755 mil / 352378 mil shares = $ 4.98/ share.

After GOODWILL RECOVERY of $ 636 mil, net value is $ 2,391 mil, = $ 6.78 /share.

e) Why float SGA, part of SGH group!

i) Last Friday I attended my son's reunion of former,2013 Melbourne Juris Doc law course graduates. I talked to some 20 graduates and questioned them about S&G.
They expressed a universal awareness of S&G 's UK problems, but also expressed a unanimous opinion that S&G was a law firm of excellence.
S&G do not appear to have suffered major damage to its reputation.

ii) The past financial performance of SGH prior to the Quindell acquisition was also excellent as evidenced by the 2014 share prices.

iii) Afloat can be organised fairly quickly,because SGA is already a separate corporate entity with its own management structure and accounting and operating systems and is well known in the financial community.

iv) This should also appeal to the syndicate bank members, because it will de-risk the loans and attract the usual lucrative fees.

v) Institutional investors could be attracted since it gives them the opportunity to recover some of the lost value.


Just a thought, and good luck to SGH shareholders, I think you are on a winner.